Wednesday, January 13, 2010

The Results of a Complicated Tax System

The Obama Administration loves to sing the praises of "transparency," but finding such in any aspect of our government is difficult to say the least. Recently the Internal Revenue Service started to bang the drum on the importance of reducing errors and fraud by placing pressure on tax preparation services like H & R Block. These companies are taking the blame for poorly filling out forms that really need to be simplified. Steve Malanga, editor for Real Clear Markets and a senior fellow at the Manhattan Institute believes that the end of errors could be found in the act of simplicity.

There is, of course, the old joke where we get a two line tax form. The first line asks, "How much did you make last year?" Second line, "Send a check or money order for that amount." That would be simple, but it would also not work because we would all either stop working or become liars about how much we make. However, this joke does put us in the right direction, according to Malanga.

The vast majority of the modern economies are moving rapidly towards a "flat tax" as a way of guaranteeing a predictable amount of revenue coming in, avoiding the punishment of individuals for earning more income (with a flat tax people pay more if they make more, but it is not in punitive way), and to eliminate the problems of complexity.

How complex is our tax code? According to Malanga, some 80 percent of households now use tax preparers or software to complete their tax returns. Furthermore, we spend 7.6 billion hours on tax compliance, according to the IRS Taxpayer Advocate, which in turn costs nearly $200 billion a year.Over the past decade (since 2001), Washington initiated 3,125 changes to the tax code, or more than one a day. Malanga refers to one recent study that ranked the U.S. tax code 122nd in complexity among 175 nations worldwide. This happens because political forces have decided to use our tax code for social engineering rather than for raising revenue. Any time a politician says he or she wants to promote policies that encourage home ownership or energy savings, they want to do so in the context of changing the tax code to encourage such. This only makes the tax system more complicated.

The system is complex, both for the taxpayer and those who prepare forms for them. A flat tax would be an improvement, although it is still a tax on wealth creation, which makes no sense for any country interested in promoting opportunity and growth. A sales tax would be better still, because it would be a simple tax on consumption. If our government did the things it is allowed to do in Article I, Section 8 of the Constitution, a very modest tariff, like our Founders intended, would be sufficient. But simplicity with either a flat or sales tax would move us in the right direction.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

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